BODY OF KNOWLEDGE
Table of Contents
History of Leasing
Classification and Terminology in Leasing
Lessor-Vendor Relationships
Credit and Financial Statement Review
Lease Law and Lease Documentation
Collections
Financial and Tax Accounting for Leases
Sources of Financing for a Leasing Company
Lease Pricing
Marketing*
Sales and Lease vs. Buy*
Lease Company Management*
Portfolio Management*
Government Leasing*
Insurance for Leasing Companies*
Agriculture Leasing*
Advanced Pricing and Structuring*
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HISTORY OF LEASING
Industry Standards and ‘Code of Ethics’
Ancient applications of leasing
Recognition of leasing under English Common Law
Beginning of leasing in the United States
Early U.S. leasing, leasing in the transportation industry
U.S. leasing by “captives”
WW II era leasing activity
General trends in the development of modern leasing
Bank involvement in leasing
Development of accounting standards for leasing
The evolution and content of tax rules governing leasing
Government involvement in the development and growth of leasing
Use of leasing in today’s economy
CLASSIFICATION AND TERMINOLOGY IN LEASING
Leasing defined
Market divisions within the leasing industry
Approaches/views towards a lease transaction
Accounting view
Tax view
Legal view
Types of leases
Single investor
Captive
Leveraged
The broker’s role in the lease transaction
Why leasing exists – reasons for its viability in the economy
Basic elements of a lease transaction
Basis for a tax view of a lease
IRS Revenue Ruling 55-540
IRS Revenue Procedure 75-21
Basis for an accounting view of a lease transaction
FASB 13
Basis for a legal view of a lease transaction
Basic definitions
Safe Harbor Lease
Sale-Leaseback
Section 38 property
Recourse vs. non-recourse
“At risk” rules
Bundled lease
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Close-end lease
Collateral
Gross lease
Full pay-out lease
Guidelines lease
Net lease
Money over money transaction
Open-end lease
LESSOR-VENDOR RELATIONSHIPS
Vendor defined
The relationship of the vendor to a lessor
The role of the vendor in a leasing transaction
Traits to look for in a vendor
Purpose of vendor programs
Elements of a vendor program
Elements of a vendor transaction
Potential problems with a vendor transaction
Potential vendor frauds
The role of the vendor invoice in the transaction
Money and the vendor
CREDIT AND FINANCIAL STATEMENT REVIEW
Role and purpose of credit
Assessment of credit risk
Lessor credit information—what is required
Definition of legal entities
Sole proprietorship
Partnership
Limited partnership
Joint venture
Corporation
Sub “S” corporation
“C” corporation
Non-profit corporation
Professional corporation
Limited Liability Corporation
Association
Trust
Municipality
Federal Government
Elements of small-ticket lease credit decision making
Elements of mid-ticket lease credit decision making
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Elements of large-ticket lease credit decision making
Credit scoring
Credit enhancements
Yield
Deposits
Advance Payments
Structuring of the lease
Term adjustment
Personal guarantees
Other guarantees
Additional security
Contract terms
Credit life/health
Vendor guarantees
Fees and charges
Cancellation/non-renewal penalties
Bundled services
Vendor discounts
Co-lessees
Structuring the lease transaction
Effects of security deposits and other advance payments on a lease transaction
Elements of a financial statement
Balance Sheet
Statement of Operations (Income Statement)
Statement of Changes in Equity
Statement of Cash Flows
Notes to the Financial Statement
Elements of a Balance Sheet
Elements of a Statement of Operations
Elements of a Statement of Changes in Equity
Elements of a Statement of Cash Flows
Elements of the Notes to a Financial Statement
Types and quality of financial statements
Internal statements
CPA prepared statements
Compiles statements
Reviewed statements
Audited statements
The audit opinion
Analysis of financial statement information
Financial statement ratios
Purpose of ratios
12 Operating ratios
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Quick ratio
Current ratio
Debt to equity ratio
Return on equity ratio
Net sales to inventory ratio
Receivables turnover ratio
Payables turnover ratio
Net sales to working capital
Profit on sales
Inventory turnover
Operating expense ratio
Accounts receivable turn day ratio
Importance of understanding financial statements
Sales process
Credit process
Role of personal financial statements in the credit process
When to obtain
When relevant to the credit decision
LEASE LAW
Basis for U.S. leasing law
Statute of Frauds
Bundle of rights concept
Legal definition of a lease
Rights associated with a lease
Warranties
Express warranties
Implied warranties
Article 2-A of the UCC code
Requirements to comply
Effects of meeting requirements
Exclusion of warranties under Article 2-A
Exclusion of warranties under contract terms
Definitions
After acquired title
Novation
“Jointly and severally liable”
Terminal Rental Adjustment Clause (TRAC)
Bankruptcy
Types of bankruptcy
Chapter 7
Chapter 9
Chapter 11
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Chapter 12
Chapter 13
Payment priorities in bankruptcy
Bankruptcy terminology
Date of filing the petition
Automatic Stay
Liquidation
Proof of claim
Bar date
Relief from stay
Preferences
Adequate protection
Plan
Cram Down
Confirmation
Executory contract
Secured creditor
Deficiency
Re-affirmation
Treatment of a lease in bankruptcy
Chapter 7
Chapter 11
True lease treatment
Secured transaction treatment
Unsecured transaction treatment
Requirements for registration as a foreign corporations
Definition of “doing business”
Effects of non-registration
On lessor
On lessee
Requirements to meet tax obligations regardless of registration
Sales and use taxes
Property taxes
Income taxes
Venue of tax liability
LEASE DOCUMENTATION
Parties to a contract
Elements of the lease documentation file
Lease documents
Lease contract
Schedules and exhibits
Delivery and Acceptance
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Guarantees
Corporate resolutions
Real estate waivers
Fixture filings
UCC filings
Additional collateral agreements
Purchase order
Cross default agreement
Invoice
Funding/advance funding agreement
Purchase options
Other miscellaneous documents
Forms of contract
Standard lease agreement
Master lease agreement
Plain language agreement
Elements & provisions of a lease contract
Identification of the parties
Identification of the vendor/supplier
Equipment location
Terms
Purpose/intent of agreement
Acceptance of equipment by lessee
Disclaimer of warranties
Article 2-A provisions
Assignment
Rental commencement and other payments
Non-cancellation provisions
Disclaimer of agency
Lessee/Lessor signatures
Choice of law/venue
Security deposits
Limited amendments, power of attorney
Provisions for location and use of equipment
Ownership provisions
Renewal provisions
Agreements for insurance, provisions for loss and/or damage
Insurance requirements
Responsibility for liens and tax liability regarding equipment
Lessee indemnification of lessor
Lessor assignment, waiver of defense clause
Service charges, late fees, interest
“Time of essence” provisions
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Default provisions
Cross default clause
Remedies to default
Provisions regarding multiple lessees
Agreement regarding enforcement expense
Modifications, changes, severability
Attachments, schedules & exhibits
Equipment lease guarantee
Purpose of the guarantee
Use in the lease transaction
Elements of the equipment lease guarantee
Parties to the guarantee
Guaranteeable interest
The guarantee made by the guarantor
Guarantor primarily responsible under the contract
Waiver of guarantor’s rights
Delivery & Acceptance
Purpose of the Delivery & Acceptance
Use of the Delivery & Acceptance
Elements of the Delivery & Acceptance
Acceptance and representations regarding equipment
Instructions to pay vendor
Unconditional nature of acceptance
Corporate resolution
Purpose of the Corporate Resolution
Use of the Corporate Resolution
Resolution to lease
Resolution to guarantee lease
Elements of the Corporate Resolution
Authority of corporation to enter into lease and/or guarantee
Identification of authorized signers for the corporation
Fixture Filings
Purpose of a Fixture Filing
Use of the Fixture Filing
Form used for Fixture Filings
Filing requirements
Protections offered from a fixture filing
Issues not protected
Real Estate Waivers
Purpose of the Real Estate Waiver
Use of the Real Estate Waiver
Form of the Real Estate Waiver
Landlord Waiver
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Lender’s Waiver
Filing requirements for a Real Estate Waiver
Elements of the Real Estate Waiver
Identification of the parties
Legal description of the property
Statement of consideration
Intent and agreement on the nature of the “fixture” covered by the Real Estate Waiver
Waiver of certain rights by Landlord/Lender
Permission to reclaim “fixture” upon default by Lessee
Signature acknowledged by a Notary Public
UCC Filings
Purpose of UCC filings in the lease transaction
Form of the UCC filing
UCC-1
UCC-2
UCC-3
Filing requirements
Filing location
Timeliness
Fees
Additional Collateral Agreements
Parties to the agreement
Purpose of an additional collateral agreement
Use of the additional collateral agreement
Form for the agreement
Requirement to perfect interest
Real Estate as Additional Collateral
Forms of security
Deed of Trust
Mortgage
Assignment of interest
Requirements for filing, perfecting interest
Anti-Deficiency laws
Invoice
Parties to the invoice
Purpose of the invoice
Content of the invoice
Use of the invoice
Form of the invoice
Purchase Order
Parties to the purchase order
Purpose of the purchase order
Content of the purchase order
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Representations required by vendor
Disclaimers and conditions set by lessor
Use of the purchase order
Form of the purchase order
Funding/advance funding agreement
Parties to the agreement
Purpose of the agreement
Use of the agreement
Contents of the agreement
Potential dangers of use
Purchase/renewal options
Parties to the option
Types of options
Purchase option
Call option
Put option
Renewal option
Use of the option
Form of the option
Potential effects of the option in the determination of the nature of the agreement
True lease treatment
Treatment as secured transaction
Lessor liability issues
Potential liabilities of lessor
As owner of the equipment
As financier of equipment
Liability protections for lessor
Contractual provisions
Insurance
Business practices
The issue of Agency
Equipment in inventory/repossessed equipment
Lessor’s status in sale or lease
Sale to end-user
Wholesale disposal
Lessor liabilities
Possible lessor protections
Contractual
Insurance
COLLECTIONS
Purpose of collections
Characteristics of a good collector
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Signs of delinquency in a lease
Typical reasons for delinquency
Overlooked due date
Lease terms misunderstood
Equipment problems
Payment priorities
Seasonal slow downs
Catastrophic occurrences
Internal accounting issues
Personal financial difficulties
Chronic slow pay
Failing business
Fraud
Types of fraud
Warning signs of fraud
Fraud prevention techniques
Bankruptcy
Progression of a delinquency and lessor actions
Initial contact
Second and subsequent contacts
Formal collections
Repossession of equipment
Voluntary return by lessee
Ex Parte
Replevin action
Claim and delivery
Litigation
Venue issues
Obtaining a judgment
Registration of foreign judgment
Action for fraud
Litigation in bankruptcy
Fraud action
Course of action on a stated “no-pay”
Written records
Importance
Use
Court evidence
History of account
Management tool
Possible collection remedies
Partial payments
Extensions
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Changes in due dates
Recovery agreements
Forbearance program
Modifications
Transfer and assumption
Other reasonable remedies
Alternative ways to make lessee contact
Types of repossession
Voluntary return by lessee
Court orders and enforced repossession
Self-help repossession
Potential dangers to lessor
Commercially reasonable sale
Elements of a commercially reasonable sale
Notice
Timing issues
Advertisement
Who may purchase at sale
Application of sale proceeds
Lessor rights to recover deficiency
FINANCIAL & TAX ACCOUNTING FOR LEASES
Definitions
Fair market value
Fair rental value
Bargain purchase option
Bargain renewal option
Economic life
Estimated residual value
Unguaranteed residual value
Lease Term
Non-cancelable lease
Minimum lease payments receivable
Lessor’s implicit rate
Calculation of lessor’s implicit rate
Lessee’s incremental borrowing rate
Initial direct costs (IDC)
Contingent rentals
Accrual basis accounting
Cash basis accounting
Aging the receivables/payables
Non-performing account
Reserves
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Amortization
Cash flow
Appreciation
Depreciation
Depreciation methods
Straight line
Double declining balance
150% declining balance
Sum of the years
MACRS
Book Depreciation
Tax Depreciation
Part year conventions
Inventory valuation methods
LIFO
FIFO
Average Cost
Liquidate
Negative cash flow
Working capital
Capitalized cost
Compensating balance
Tax accounting methods
Book accounting methods
Sales and use taxes
Lessor liability
Reporting requirements
Payment options
Liability on residual sale
Liability on assignment or lease by lessor
Personal Property Taxes
Assessment process
Lessor liability for personal property taxes
Historic view of FASB 13
Provisions of FASB 13
Historic view of IRS Revenue Ruling 54-540 and Revenue Procedure 75-21
Provisions of Revenue Ruling 55-540
Provisions of Revenue Procedure 75-21
Book accounting for a capital lease
Determination of accounting treatment through FASB 13 rules
Calculation of “90%” rule
Lessor’s treatment using lessor’s implicit rate
Lessee’s treatment using incremental borrowing rate
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Entering the capital lease on the lessor’s balance sheet
Entering the payments received from the lessee on a capital lease on the lessor’s balance sheet and operating
statement
Entering the capital lease on the lessee’s balance sheet
Entering the payments paid by the lessee on the lessee’s balance sheet and operating statement
Tax accounting for a non-tax (capital) lease
Determination of tax treatment through Revenue Ruling 55-540 and, as applicable, Revenue Procedure 75-21
Entering the non-tax lease on the tax books of the lessor
Entering the payments received from the lessee on the tax books of the lessor
Entering the non-tax lease on the tax books of the lessee
Entering the payments paid by the lessee on the tax books of the lessee
Book accounting for an operating lease
Determination of accounting treatment through FASB 13 rules
Calculation of “90%” rule
Lessor’s treatment using lessor’s implicit rate
Lessee’s treatment using incremental borrowing rate
Entering the operating lease on the lessor’s balance sheet
Entering the payments received on an operating lease on the lessor’s balance sheet and operating statement
Entering the operating lease on the lessee’s balance sheet
Entering the payments paid by the lessee on the lessee’s balance sheet and operating statement
Tax accounting for a tax (operating) lease
Determination of tax treatment through Revenue Ruling 55-540 and, as applicable, Revenue Procedure 75-21
Entering the tax lease on the tax books of the lessor
Entering the payments received from the lessee on the tax books of the lessor
Entering the tax lease on the tax books of the lessee
Entering the payments paid by the lessee on the tax books of the lessee
Reasons for differences in treatment of a lease between book and tax
Accounting treatment
Different rules between tax and book
Accounting methods
Accrual vs. Cash
Difference in book accounting treatment between lessee and lessor
Lessor’s implicit rate vs. lessee’s incremental borrowing rate
SOURCES OF FINANCING FOR A LEASING COMPANY
Sources Include
Bank and/or Financial Institution
Finance Company
Private Loans
Other Lease Companies
Pension Funds
Insurance Companies
Common Funding Methods
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Internal Funding
Brokerage
Discounting
Definition of “discounting”
Elements of the discount transaction
Mathematical calculations for the discount transaction
Timing adjustments
Economics of the discount transaction
Effects of discounts, holdbacks, or other reserves
Lease Packaging
Lease package defined
Elements of a lease package
Who determines the content
Who determines the structure
The package “narrative”
The package “request”
Financial data analysis as part of the lease package
Tailoring the package to the requirements of the funder
Equity and Debt
Sale of company interest
Common stock
Preferred stock
Issues of company control
Shareholder issues
Securities law compliance
Cost of funds
Private Investors
Transactional sales
Portfolio Sales
Determination of price and terms
Possible effects on remaining portfolio
Marketing considerations
Public Debt Offering
Corporate bonds
Other debt instruments
Securities law compliance
Limited partnerships/trusts
Asset Securitization
Nature of the securitization transaction
Asset backed financing
Structure of the securitization transaction
Pay through structure
Pass through structure
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Parties to a securitization and their respective roles
Lessee
Lessor
Attorney
Outside auditors
Rating agencies
Outside servicer
Appraiser
Investment Bankers
Trustee
Investor
Institutional
Individual
Lessor motivations and benefits in a securitization
Potential lessor problems in a securitization
Servicing obligations
Tax considerations
Sale vs. loan treatment of the transaction
Book treatment
Tax treatment
Personal property tax considerations
Sales and use tax considerations
Recourse vs. non-recourse structure/UNL
Credit enhancements
Economics of the securitization to the lessor
Cost of funds
Transactional costs
Securitization strategies for the lessor
Short term benefits and detriments
Long term benefits and detriments
Securities law compliance and liability
LEASE PRICING
Time use of money concept
Cash flow diagrams
Structuring of a payment
Principal plus interest
Amortizing payment
Basic elements of a lease transaction
Term
Number of payments/Number of advance payments
Equipment cost
Indirect costs
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Lease payment
Residual value
Security Deposit
Lessor’s yield
Other fees/costs
Understanding the transaction
Application of the cash flow diagram to the lease transaction
Mathematical computation for a lease transaction
Solving for any unknown element in the transaction
Determining the rate factor for a lease transaction
Computing unusual payment structures
Skip payments
Step payments
Hi-low payments
Seasonal payments
Definitions of terms
Internal rate of return
Stream rate
Basis points
Points
MARKETING*
Potential market for leasing in today’s economy
Development of a marketing plan
Elements of a marketing plan
Choosing business type
Choosing industry type
Choosing equipment type
Choosing a geographic area
Defining the customer
Identifying sources of funds
Identifying available programs
Limitations
Product availability
Marketing strategies
SALES*
Definition of sales effort
Purpose of sales within the lease organization
Elements of the sales process
Introduction
Body
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Close
Overcoming objections
Pre-emptive principle
Using questions to determine the real objection
Closing the deal
Closing techniques
The sales proposal
Defining the contents of the sales proposal
The salesman’s main tool – knowledge
Financial statements
Credit requirements and criteria
Credit reporting and credit report data
Tax returns
Business structure and operation
Lease pricing
Lease structuring
LEASE VS. BUY DECISION MAKING*
Selling the lease vs. buy decision
Knowledge of customer
Motivations
Concerns
Intended use of equipment
Personality
Company decision making process
Financial situation/Tax situation
Knowledge of Product (leasing)
Rates, yields, time use of money
Financial statement impacts of leasing
Tax impacts of leasing
Convenience considerations
Other implication of using leasing
Options for acquisition/use of equipment by lessee
Elements of the lease vs. buy decision
Equipment considerations
Budget and decision making
Conveniences
Financial statement impacts
Tax consequences
Cash flow issues
Costs
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LEASE COMPANY MANAGEMENT*
Structure/organization of a lease company
Key management
Role of key management
Management Issues
Administration
Organizational structure
Human resource issues
Efficiency
Financial Management
Budgeting
Cash flow
Financial Statements
Profitability
Cost of Capital
Reserves
Managing Cash flows
Credit Decision Making
Impact on debt/financing
Establishing company policy and criteria
Impact on marketing efforts
Impact on portfolio composition and performance
Impact on profitability
Timing issues
Lessor servicing
Third-party contract servicing
Personal property tax issues
Sales tax reporting
Internal systems and reporting issues
PORTFOLIO MANAGEMENT*
Issues related to portfolio management
Portfolio quality
Residual realization
Financial statement integrity
Maintenance of financial relationships
Competition
Insurance issues
Personal property tax exposure
Marketing and sales efforts and requirements
Quality of accounting data
Recourse exposure
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Delinquencies
Concentrations
Asset management and disposition
Profitability
Projections for the future
Analysis of the lease portfolio
Weighted averages
Computing weighted averages
Determining the portfolio yield
Weighted average yield
Determining the portfolio term
Weighted average term
Ramifications of portfolio term on portfolio management and lease company management issues
Analysis of portfolio aging
Residual valuations
Tracking actual residual realizations
Loss reserves
Methods for determining loss reserves
Portfolio concentrations
Types of concentrations
How concentrations may occur
How concentrations may be avoided
GOVERNMENT LEASING*
Definition of “government”
Municipal
Federal
Quasi-Federal
Prime Contractors
Indian tribes and nations
Not-for-profit entities
Public and private activities
Municipal government lease documentation
Form of lease agreement
Bank qualification letter
Legal opinion
Proof of authority
U.S. form 8038G or 8038GC
UCC-1
Statement of essential use
Acceptance certificate
Insurance documentation
Delivery and Acceptance
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Other miscellaneous documentation
Federal Government lease documentation
Purchase order
Addendum to purchase order
Inspection, receiving & acceptance report/certificate
Vendor documentation
Special terms and conditions in government leases
Non-appropriations clause
Non-Substitution clause
Termination at the convenience of the government
Base closure clause
Contract termination clause
Benefits of government leasing
Tax benefits
Municipal
Indian tribes and nations
Federal Government
INSURANCE FOR LEASING COMPANIES*
Definition of Insurance
Understanding Insurance Contracts
Legal Purpose
Legal Capacity of the Parties to a Contract
Genuine Assent
Types of Insurance
Business Owner Policy (BOP)
Key Man Insurance
Fleet Insurance
Garage Liability
Residual Value Insurance
Rating Agencies
Functions of Insurance
Spread of Risk
Basis of Credit System
Eliminates Worry and Encourages Entrepreneurship
Loss Prevention and Loss Reduction
Source of Employment and Investment Capital
Risk Assessment
Retention of Risk
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AGRICULTURE LEASING*
Agricultural Entities
Company Structures
Types of Entities
Types of Equipment that can be leased
Forms of Agriculture
Growing crops
Dairy production
Forestry
Animal husbandry
Viticulture
Ornamental crops (horticulture)
Raising of fish and shellfish
Raising of fowl
Areas of commerce within Agriculture
Growing
Distribution
Marketing
Processing
Special types of Agricultural finance
Public Programs available to US farmers
Agricultural insurance
Programs
Types
Special Agricultural lease pricing
Payments
Periodicity
Seasonality
Equipment
Transaction Structures
Lending to Agricultural Businesses
ADVANCED PRICING AND STRUCTURING*
Definitions of true leases
IRS rulings & procedures
Issues affecting lease pricing
Tax Depreciation
Term
Residuals
Lessor’s yield
MACRS
Lessor’s tax rate
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Sinking fund rate
Tax lease pricing methods
Purchase Option considerations
Appraisal definitions
Fair Market Value
Orderly Liquidation Value
Forced Liquidation Value
Stipulated Loss Value
Bargain Purchase Option
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